The exit fee nobody prices until month eleven

The declining step structure you outlined is the cleanest version of this I have seen described in a thread. The piece worth pulling apart is what assumption is doing the most work in it: you are assuming the borrower actually reads the step schedule and models against it at closing. Most do not. The fee shows up, they nod, and they go back to their ARV math. So the disclosure mechanic is still the problem even with a well-designed schedule, because a legible structure does not help if it gets the same paragraph-fourteen treatment.

The lender risk you did not name is the extension scenario. Your example is a borrower who exits cleanly at month eleven and discovers the fee on payoff. The harder case is a borrower who cannot exit because the refinance fell through and needs a six-month extension. Now you are negotiating extension terms on a loan where the exit fee has already been a point of friction, the asset has sat for eleven months, and the market may have moved. If your exit fee structure does not specify how it interacts with an extension, you have ambiguity at exactly the moment both sides are already stressed. A flat fee waived upon extension request is different from a fee that resets the clock. Both are defensible but they need to be written, not assumed.

On the lender's yield protection case, you are right that exit fees solve a real problem. The three-month payoff on a twelve-month note is not a neutral event for the lender. Confirm with your attorney how your jurisdiction treats prepayment penalty disclosure requirements, because some states have specific mechanics for how these fees must appear in consumer-facing notes, and even investor loans can carry disclosure obligations depending on how they are structured.

How are you currently handling the interaction between exit fee terms and extension requests in your note language?

The part that rarely gets modeled is how an exit fee interacts with a minimum interest clause in the same note. If a lender writes a twelve-month minimum interest provision and a two-point exit fee, those can stack on a month-three payoff: the borrower owes nine months of phantom interest plus the exit fee, and the effective cost on that $300,000 note stops looking like a bridge loan and starts looking like a penalty structure. Most borrowers do not catch the overlap because they read the exit fee paragraph and the minimum interest paragraph as separate provisions.

A cleaner construction separates yield protection into one mechanism, not two. Either a declining exit fee that steps down as you described, or a minimum interest floor, but pricing both into the same note means the lender is double-collecting on early exit risk. That is defensible legally in most states, but it produces the payoff-demand surprise you are describing at twice the magnitude.

When you are quoting the declining step structure, are you also waiving the minimum interest clause, or are you running both in parallel?